Project selection methods I
Project selection methods help organizations decide among alternative projects and determine the tangible benefits to the company of choosing or not choosing the project. Project selection methods will vary depending on the company, the people serving on the selection committee, the criteria used, and the project.
Most organizations have a formal, or at least semi-formal, process for selecting and prioritizing projects. In my organization, a steering committee is responsible for project review, selection, and prioritization. A steering committee is a group of people comprising senior managers and sometimes mid level managers who represent each of the functional areas in the organization.
Here’s how our process works: The steering committee requests project ideas from the business staff prior to the beginning of the fiscal year. These project ideas are submitted in writing and contain a high-level overview of the project goals, a description of the deliverables, the business justification for the project, a desired implementation date, what the organization stands to gain from implementing the project, a list of the functional business areas affected by the project, and (if applicable) a cost-benefit analysis.
There are generally two categories of selection methods: mathematical models (also known as constrained optimization methods) and benefit measurement methods (also known as decision models).
This article will cover the following selection methods
- Constrained Optimization
- Benefit measurement
Also called constrained optimization methods, are a category of project selection methods.
They are complex mathematical models that use linear, dynamic, integer, nonlinear, or multi-objective programming in the form of algorithms, or in other words, a specific set of steps to solve a particular problem.
These are complicated mathematical formulas and algorithms that are beyond the scope of PMP and require an engineering, statistical, or mathematical background to fully understand them. The vast majority of project selection techniques will use the benefit measurement methods to make project selection decisions.
Benefit measurement methods
It includes comparative methods, scoring models, and cash flow analysis.
One common benefit measurement method is the cost-benefit analysis. As the name implies —it compares the cost to produce the product, service, or result of the project, to the benefit (in the form of savings or revenue generation) that the organization will receive. Obviously, a sound project choice is one where the costs to implement or produce the product of the project are less than the financial benefits. How much less is the organization’s decision? Some companies are comfortable with a small margin, while others are comfortable with a much larger margin between the two figures.
A Benefit Cost Ratio (BCR) of more than 1 means that the benefits are greater than costs.
A Real World Example
New Product in the Market
Your company is considering developing and marketing a database software product that will allow an Insurance company to dissect their customer base, determine which types of customers buy which types of policies, and then market more effectively to those customers.
You will take into account some of the following costs:
- The costs to develop the software, such as application development team costs, hardware costs, and testing costs
- Marketing costs such as advertising, traveling costs to perform demos at potential customer sites, and so on
- Ongoing costs such as having a customer support staff available during business hours to assist customers with product questions and problems
Let’s say the cost to produce this software plus the ongoing support costs total Rs 80 Lac.
Initial projections look like the demand for this product is high. Over a three-year period which is the potential life of the software in its proposed form; projected revenues are Rs 2.5 Cr. Taking only the financial information into account, the benefits outweigh the costs of this project. This project should receive a go recommendation.
Projects of significant cost or complexity usually involve more than one benefit measurement method when go or no-go decisions are being made or one project is being chosen over another. Please note that the selection methods can take subjective considerations into account as well—the project is a go because the idea was give by the new CTO of your company.
Questions & Answers
- Mathematical models using linear, dynamic, integer or algorithm models are consider _______________
- A. project selection criteria
- B. a form of expert judgment
- C. project selection methods
- D. a form of historical information
Correct Answer: C. Mathematical models can be used to determine which projects are worth undertaking.
- Your project selection committee used a weighted scoring model and found that Project B, with a score of 70, should be chosen over the other competing projects. Which of the following is true?
- A. Weighted scoring models are benefiting measurement methods.
- B. Weighted scoring models are constrained optimization methods.
- C. Weighted scoring models are benefit measurement methods and are the least efficient method of project selection.
- D. Weighted scoring models are a type of mathematical model that can be used for both project selection and vendor selection.
Correct Answer: A. Benefit measurement methods include comparative methods and scoring models, among others, to make project selections.
- If the benefit cost ratio of project A is 2.75, the benefit cost ratio of Project B is 1.5 and the benefit cost ratio of Project C is 1.95 which project would you select.
Correct Answer: Project A – as the BCR of Project A is higher
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